Variable Rate Mortgage Solutions

Variable rate mortgages Toronto

When shopping for a mortgage, many home buyers shy away from variable rate mortgages in favour of fixed rate mortgages (FRM) that offer more stability and allow for better planning and budgeting. However, not all mortgage rates are designed equally; they can have variable interest rates and terms and conditions.

Variable rate mortgages Toronto

Variable rate mortgages (VRM) in Toronto are priced based on lender prime rates, and usually fluctuate depending on whether the Bank of Canada (BoC) raises or lowers its overnight rate.

Although fixed rate mortgages appear to be rising, many patrons are contented with the certainty of a fixed monthly payment. On the other hand, VRM are fairly low cost, though they are the riskier of the two. That said, the BoC has recently appeared to be cautious of the economic outlook (low oil prices, weak Canadian Dollar relative to the US Dollar), which makes it unlikely to raise its overnight rate in the near future.

Moreover, the BoC considered dropping its overnight rate during its early 2016 policy meeting, though it did not. Nevertheless, this is an indication that the bank’s current rate bias is to the downside. Comparing the current low-inflation, low-growth inflation domestic environment to the global bond market where nearly one-third of the world’s government bonds are trading at negative yields, there is a much lower chance of the BoC increasing its rate in the near future.

Other reasons to opt for variable rate mortgages

Variable rate mortgages in Toronto seem like a good option for the next couple of years, but beyond the low interest rates offered, there are other advantages of VRM over FRM, including:

More flexibility: Compared to VRM, FRMs tend to have very harsh penalties if broken. If, for instance, you break a VRM mid-term, the penalty assigned is usually limited to three months worth of interest, whereas FRM penalties are summed up as the greater of 3 months’ interest, or interest-rate differential (IRD), which can be significant

More savings: Even without taking into account the recent BoC trends, people who have opted for VRM have made significant savings over the years. It seems risky, but one study conducted by a finance professor at York University revealed that the five-year VR saved Canadians money about 90 percent of the time between 1950 and 2007. In a 15 year period, borrowers were able to save over $20,000 per $100,000 borrowed

Is a variable rate mortgage right for you?

Today, variable rate mortgages in Toronto are a great option, and since the short-term fixed rates used to determine mortgage penalties are quite high compared to bond yields, it is perhaps a good time for the people of Toronto in a FRM to break and move to a VRM.

To identify your lender’s mortgage penalty for breaking your current mortgage, our experts at Northwood Mortgage can help you work it out, and also provide you with a report that will help you identify any savings you are likely to make by switching to lower variable rate mortgage in Toronto.

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